Embrace Living Paycheck-To-Paycheck To One Day Be Free
Living paycheck-to-paycheck is an unpleasant financial experience. Not only does it mean needing to spend everything you have to make ends meet, it may also create an ongoing feeling of despair.
You might even have to get into debt to pay your bills. And if you aren’t careful with debt usage, it may become a habit that eventually grows large enough to take you under.
Living paycheck-to-paycheck can result from either self-inflicted wounds, such as buying too many things you don’t need, or unfortunate circumstances like job loss or unexpected medical expenses.
Regardless of the cause, it’s crucial to acknowledge our situation and take control of what we can. Although it might feel embarrassing or even shameful to be in a difficult financial place, embrace these feelings and use them as motivation to move forward.
My First Experience Living Paycheck-To-Paycheck
Once I graduated from college in 1999, I no longer had the support of The Bank Of Mom & Dad.
Securing a job in Manhattan for $40,000 a year, even back then, didn’t stretch very far. To cut costs, I shared a studio apartment with my high school friend and took advantage of the free cafeteria food if I worked after 7 pm. The studio cost $1,800 a month total, plus utilities.
Faced with the challenges of work, I made a strategic decision to max out my 401(k), which had an employee contribution limit of $10,500 at the time. It was my main hope for eventual financial freedom.
With $29,500 in gross income remaining, money was consistently tight that first year. However, I maintained hope that my career would progress, bringing in more income. By the second year, my base salary increased to $55,000, bringing much-needed relief.
Below was my budget in 1999-2000 while living at 45 Wall Street, New York, New York. At the time, it was all work and maximum frugality in order to one day be free. This was when my desire to FIRE by 40 began.
My Second Experience Living Paycheck-To-Paycheck
The second time I found myself living paycheck-to-paycheck was in 2012, following my departure from my finance job. After a ~80% decline in total income, I had to carefully manage my budget, relying on almost all my passive income for basic living expenses.
After a year-and-a-half of early retirement, I opted to undertake some consulting work at Empower (previously Personal Capital) from 2013-2015. This consulting income provided a welcomed buffer, offering respite from the paycheck-to-paycheck lifestyle.
In hindsight, I may have retired about five years too soon, but my severance package acted as the impetus for taking a leap of faith. It was then or never! Had early retirement not worked out, I would have gone back to work by age 37.
As long as my passive income covered my living expenses, I invested nearly all of my part-time consulting earnings in stocks and a fixer-upper in 2014. Thanks to a robust recovery in both the stock and real estate markets, I managed to break free from the paycheck-to-paycheck lifestyle within a couple of years.
Latest Experience Living Paycheck-To-Paycheck
Today, I find myself back in the paycheck-to-paycheck cycle because I sacrificed a significant portion of my passive income to purchase a forever home in October 2023. This self-inflicted decision has left me with over a $100,000 annual deficit between my passive income and desired household expenses. Any large expense or surprise capital call will compromise my family given our lack of liquidity.
In response, my wife and I have committed to adopting a more frugal lifestyle for the next 24 months to rebuild our savings. The journey has been challenging, with several unexpected expenses. Despite these financial setbacks, I’m confident we will persevere.
My ultimate goal is to generate an additional $150,000 in gross passive income by 2029. While the goal may seem daunting, I remain optimistic. A continued bull market, a fortuitous exit from a venture capital investment, new income opportunities, and a shift towards higher-yielding assets could make this goal attainable. Then again, another recession could make this goal impossible.
Actions To Take To Stop Living Paycheck-To-Paycheck
To give ourselves a greater than 65% chance of reaching this capital accumulation target in five years, we’ve embraced the paycheck-to-paycheck lifestyle. This entails meticulous budgeting, expense reduction, and boosting income.
I’ve lived this life twice before, and I will do so again until the financial strain stops. If you want to achieve FIRE, then adopting this type of financial focus will help you get there quicker.
The following outlines our plan to break free from a financial whirlpool we find ourselves in and eventually regain financial freedom after 3-5 years. We are on this quest based on following this first rule of FIRE.
If you’re navigating the paycheck-to-paycheck scenario, perhaps you’ll find these strategies motivating.
1) Embrace an ultra-frugal way of life
Upon purchasing our new house, my wife and I committed to a bare-bones approach to expenses. This primarily involved cutting back on dining out, avoiding food delivery, and refraining from buying new clothes. Eating less should also help us lose some weight too.
To exemplify our frugality, I had been contemplating purchasing a new $105 Nike fitness jacket to replace my three-year-old, stained, and fraying one. However, due to our spending moratorium, I opted to continue wearing the old jacket until the zipper eventually broke. Now, I’m having it repaired by a tailor for $28.
While spending $105 may not lead to financial hardship, frugality is a mindset to embrace. Every expense counts. This extends to practices such as turning off electrical devices when not in use, minimizing water consumption, and appreciating the possessions we already own. The latter has been particularly rewarding, considering I still have unused items purchased from years ago.
Potential annual savings: $18,000
2) Apply to public schools
I decided to apply to two public schools in our neighborhood to see if we could save $42,000 a year in private grade school tuition for our son. We couldn’t get into our top choice, so public school for our son isn’t going to work this year.
For now, I value being able to speak a second language well versus the cost of 10 years of private grade school tuition. Therefore, this is the path we’re going to take for our children. We will make changes if there comes a point where the school or foreign language no longer seems worth it.
In the meantime, I am increasing my effort in being a teacher to our children. Perhaps the more I teach, the less they will need to learn and the quicker they can graduate school. My wife, for example, graduated from college in 3.5 years. I’m also open to homeschooling once we attempt to do long travel.
Potential annual savings: $42,000 – $84,000
3) Drive our car for another five years
Originally, I had planned to replace our car in the second half of 2025, once it reached the ten-year mark. Typically, there are noticeable improvements in technology, safety, and performance features every ten years.
However, due to our current paycheck-to-paycheck situation, buying a new car in 2025 is no longer appropriate. Instead, I’ve adjusted my plan to target a new car purchase in 2029, coinciding with my goal of returning to financial independence.
Currently, my car has 51,000 miles on it, and with an average annual driving distance of 6,200 miles, it is projected to have around 82,000 miles by 2029 when it is 15 years old. Having recently replaced several expensive parts in 2023 and 2024, I hope that the next 31,000 miles won’t incur significant maintenance costs. Considering I drove two of my previous cars (Land Rover Discovery II and Toyota Corolla FX16) to 135,000 – 150,000 miles, reaching 82,000 miles shouldn’t be an issue.
The choice of car in 2029 will also depend on the financial progress I make given I will follow my 1/10th rule for car buying. Currently, rather than opting for a luxury car, I am considering the Honda CR-V EX model, priced at around $34,000 new or $25,000 used. My primary focus is on a safe and reliable vehicle that won’t incur frequent high repair costs.
Driving a more affordable car not only reduces stress about potential damages but also helps curb the desire for more luxurious items that often accompanies wealth growth. However, safety is still my #1 priority when transporting my family.
Potential total savings: $40,000 – $60,000
4) Reduce partaking in expensive social gatherings
As part of adapting to the paycheck-to-paycheck lifestyle, I recognize the need to cut back on expenses in the entertainment department.
Take, for instance, an upcoming dad’s night out plan involving a steak dinner before the Warriors game. The steak dinner is estimated to cost around $150 per person, and the Warriors ticket adds another $300 to the expense. Additionally, transportation is expected to be around $60 for a round-trip.
While I appreciate a good steak and an exciting NBA basketball game, it’s not financially responsible to spend $500+ on such an evening activity when my liquidity is low. Instead, I’ll opt for a simple home-cooked meal while watching the game on TV. I can catch up with the dads at the next birthday party or playdate.
Fortunately, I don’t experience a significant fear of missing out (FOMO) when it comes to activities, as I’ve already enjoyed many of the things I wanted to do during my 12 years of fake early retirement. Having indulged in numerous steak dinners, especially during my corporate card days in finance, and having got to plenty of Warriors games already, I don’t mind passing up on this particular event to save.
However, I do grapple with investing FOMO, likely stemming from my 13 years in equities and witnessing poverty during my upbringing. There’s a constant fear that if I don’t consistently invest a significant portion of my income, I also find our family struggling.
As a result, I almost always have a preference to investing in real estate or stocks versus spending lots of money on a brief period of entertainment.
Crossed off a bucket list by getting floor seats for my dad watching the Warriors
Potential annual savings: $5,000 – $10,000
5) Say no to any further type of debt
My decision to purchase my home with cash reflects my personal aversion to taking on debt at this stage in life. As I’ve become more risk-averse, particularly with family responsibilities, avoiding fees, financial complexities, and dealing with higher interest rates in the current economic climate has become a priority.
For those living paycheck-to-paycheck, it’s crucial to not only cease accumulating additional debt through credit cards and other financial instruments but to also take proactive steps to pay down existing debts.
Prioritize paying off your highest-interest debts to save the most on interest expenses. Alternatively, if you prefer quicker wins, focus on paying off your lowest debt balances first.
I don’t plan to buy anything for the entire year. In fact, I plan to donate or sell items to declutter and raise money.
6) Find part-time consulting work
Now that we’ve tackled expense reduction, let’s shift our focus to boosting income. Increasing income is the main way we can break out of the paycheck-to-paycheck cycle. I aim to secure a part-time consulting role in 2024.
Additionally, I’ve received offers to serve as a brand ambassador or speaker for various companies. However, I’ll only consider opportunities that align synergistically with my values.
In parallel, my wife is exploring potential consulting opportunities. She already handles a significant portion of childcare and Financial Samurai-related work. With more available time once our daughter starts school full-time, any supplementary income becomes beneficial in our current financial situation.
Estimated annual income potential: $20,000 – $200,000
7) Find tenants for my old home
While I wasn’t initially inclined to handle another physical rental property, my investment strategy for west side San Francisco real estate has led me down this route.
The imminent opening of a new school and a substantial $4 billion hospital renovation project is poised to introduce over 1,400 new jobs by 2030 in the area. Moreover, there is a prevailing demographic shift towards the west side, fueled by the prevalence of remote work and improved affordability compared to downtown.
Anticipated annual income after all expenses: $35,000 – $45,000
8) Write more books
I find joy in writing books, as the journey from conceptualization to the final product is highly satisfying. The tangible experience of holding a book I’ve authored, smelling its pages, and engaging in playful activities like “find daddy’s book” with my kids at the bookstore is priceless.
Another motivating factor for my book-writing endeavors is to exemplify to my children the importance of academics. I hope that by witnessing my commitment to reading, writing, editing, and producing, they will develop a similar dedication to their own academic pursuits.
Typically, authors receive 1/4th of their book advance upon signing, another 1/4th after submitting the manuscript, followed by 1/4th upon publication, and the final 1/4th after the first anniversary of publication. I am set to submit my final manuscript in 1H2024 for my second book with Portfolio Penguin.
Projected annual gross income: $35,000 – $55,000
9) Monetize Financial Samurai better
The enduring success of Financial Samurai since 2009 is rooted in maintaining an 80% focus on enjoyment and a 20% focus on the business side of website management. Whenever the balance tilts more towards business, the writing loses its appeal and starts feeling like labor.
Take, for instance, the Financial Samurai podcast, available on platforms like Apple and Spotify. It intentionally excludes advertisers, and a 45-minute episode demands about two hours of production time. To sustain this effort, I must either secure sponsors, record less often, or shorten the episodes.
In my writing, I like delving into problems and offering solutions mainly through storytelling. In contrast, many professional bloggers prioritize a business-centric approach to boost Google rankings and generate affiliate income by writing product review posts.
While this strategy may be lucrative, it compromises the enjoyable aspect of writing. However, given my family’s current financial situation, I acknowledge the need to shift my 80% fun / 20% business ratio closer to 60% fun / 40% business over the next one-to-three years.
One dilemma is interacting with readers who find ads annoying on free content, yet are unwilling to pay a subscription fee or purchase my books, like How To Engineer Your Layoff or Buy This Not That. This realization has prompted me to be more self-focused and prioritize my family’s financial well-being. Goodness knows being an author usually doesn’t pay well.
Annual additional gross income potential: $12,000 – $36,000
Embrace The Reality Of Living Paycheck-To-Paycheck
Living paycheck-to-paycheck can undoubtedly be stressful. But was some behavioral changes, things will hopefully get better. I see our family’s self-inflicted financial constraints as an opportunity to cut expenses and boost income over the next three years.
It’s like pressing a giant reset button as we go on a new financial independence journey.
Impulse buying without considering consequences is a thing of the past. Each expenditure will now face meticulous scrutiny, and if it doesn’t hold significant value, we won’t proceed with the purchase.
I’ve also decided to be more intentional about how I spend my time, avoiding casual assistance without compensation. The current circumstances demand a focused approach to earning, ensuring the well-being of my family.
With discipline and time, I am confident we will break free from the paycheck-to-paycheck cycle. The ultimate goal is that by 2029, not only will we have a paid off forever home, we’ll also have enough passive investment income to cover our desired living expenses once more. During this time, I hope to instill in our children a frugal mindset and a strong work ethic.
To those facing a similar situation, stay resilient and use this challenging period as an opportunity to reshape your behavior for long-term financial success.
Even if you are flush with cash each money, you may want to adopt some of my recommendations to one to be free. With dedicated efforts and time, better financial conditions await!
Reader Questions And Suggestions
Have you ever found yourself living paycheck-to-paycheck? If so, when was this and how did you get out of it? What are some other tips you have for helping people get out of a difficult financial situation?
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